If nominal interest rates have a lower bound of zero and deflation occurs at 3% (i.e.,the inflation rate equals -3%,then the lowest real interest rate possible is
A)-3%.
B)0%.
C)3%.
D)6%.

Question

Quizplus · Accepted Answer

The lowest real interest rate possible in this scenario is 3%. This is because with nominal interest rates at a lower bound of zero and deflation at 3%, the real interest rate is calculated as the nominal rate minus the inflation rate, which in this case of deflation becomes 0 - (-3%) = 3%.

If Nominal Interest Rates Have a Lower Bound of Zero